Using Options To Pay Off Debt

As investment tools, options can provide great leverage and tremendous, potential upside but options can also be used as a part of a well-rounded debt reduction plan. Here's a run-down of some preeminent option strategies that can serve as debt reducers through net credits and potential gains.

Covered Call Option
Put simply, a covered call option allows the investor to generate cash flow through option premiums and transform the underlying asset into a virtual rental property.

An Example
An investor owns 100 shares of Coke at $70 and sells an $80 Coke option contract generating $90 in total premium for a 1.3% return on top of the $7,000 investment. The buyer of the option is granted the right (but not the obligation) to buy the stock at $80 a share. If the stock ends above the strike price, $80 in this case, then the option will likely be exercised.

The 1.3% return in premium in this example seems paltry, but keep in mind that if the option is near-month, this return is monthly. Once annualized, this return comes to 15.43%. Not too shabby. Of course this depends on achieving the same level of performance throughout the year.

Using It to Pay off Debt
The premium earned in the covered call strategy serves as a debt eliminator.

Iron Condor
An Iron Condor strategy is composed of two strangle positions: a long and short position in each case, four different options each with its own strike. The strangles at the two middle strike prices create a wide area for profit and the maximum profit is equal to the net premium received, minus the commissions paid. The investor utilizing this strategy is collecting a premium and hoping that the options expire worthless at the end of the cycle.

An Example
An investor buys one October SPX 1,450 call for $4.50 and sells an October SPX 1,440 call for $8.80. At the same time, an October SPX 1,350 is purchased for $93 and an October SPX 1,340 is sold for $102.90. The total credit comes to $14.20 with a maintenance requirement of $209.20 for a potential gain of more than 7%.

Using It to Pay off Debt
In this strategy, the investor is collecting an up-front premium and hoping for a worthless expiration. If this happens, the $1,420 in premium can be applied to debt.

Iron Butterfly
Similar to the Iron Condor, the Iron Butterfly is created with four options at three consecutively higher strike prices. Because of the offsetting long and short positions, this architecture limits the amount of risk and reward.

An Example
In-A-Gadda-Da-Vida

The Iron Butterfly investor buys one OTM call, sells an ATM call, sells an ATM put and buys one OTM put thus creating a long or short straddle with the options in the middle. This strategy limits the amount of risk and reward because of the offsetting long and short positions. "If the price falls dramatically and the investor holds a short straddle at the center strike price, the position is protected because of the lower long put."

The investor buys one November $45 call at $1.05, sells one November $44 call at $1.50, buys one November $43 put at 50 cents and sells one November $44 put at 75 cents to open. The net credit is equal to ($1.50 - $1.05) + (75 cents - 50 cents) or 70 cents.

Using It to Pay off Debt
The profit potential in this strategy lies in the arch of the butterfly's back: a limited range created by the straddle. Additionally, the structure set-up results in a net credit spread resulting in potential debt reduction premium.

Bear Call Spread
In expectation of a price decline in the asset, the option strategist sells call options at a specific strike price while also buying the same number of calls at a higher strike price.

  • A call with lower strike price is sold and a call with a higher strike price is purchased.
  • Both have the same underlying stock and the same expiration date.

The Bear Call Spread strategy pays off when the price of the stock drops below the strike of the short positions.

An Example
The investor sells 1 ABC June 40 Call at $3.40 per share and buys 1 ABC June 45 Call at $2 per share. This spread is created at a net debit of $1.40 not including commissions.

Using It to Pay off Debt
If the example position falls below 40 by the expiration, then both positions will expire worthless and the total position profit is the $1.40 spread. If the underlying stock ends between 40 and 45, then the 45 expires worthless but the 40 call will have value. The break-even point is equal to the lower strike price plus the total cost of the spread or $41.40 in this case.

The Bottom Line
Net credits and gains received from the previously detailed option strategies can be used as part of a well-rounded financial plan designed to reduce debt. The Covered Call, Iron Condor, Butterfly and Bear Spread can each be used in tangent with neutral to bearish outlooks that allow investors to generate income which can be used for debt reduction.



More From Investopedia

--

Get stories like this on the Yahoo app and discover more every day.
Download it now.
Loading...
  • Oil falls on bullish Fed talk and rising dollar AFP - 5 minutes ago

    Oil prices fell on Monday as the dollar rose following relatively bullish talk from the US Federal Reserve. In an address on Friday, US Fed Chair Janet Yellen said there was growing justification for a ... … More »

  • Oil down on glut, dollar; Nigeria rebels add to bearish outlook
    Oil down on glut, dollar; Nigeria rebels add to bearish outlook Reuters - 13 minutes ago

    Oil prices settled down more than 1 percent on Monday, snapping two consecutive days of gains, on caution over galloping Middle East crude output and a firmer dollar boosted by speculation of a U.S. rate hike by year-end. A pledge by Nigerian … More »

  • Grain lower, livestock mixed Associated Press - 15 minutes ago

    Grain futures were lower Monday on the Chicago Board of Trade. Wheat for Sept. declined 13 cents at $3.7050 a bushel; Sept. corn lost 4.50 cents to 3.1175 a bushel; Sept. oats was off 7 cents at $1.62 ... … More »

  • Gold turns up from near five-week low as dollar eases
    Gold turns up from near five-week low as dollar eases Reuters - 35 minutes ago

    NEW YORK/LONDON (Reuters) - Gold rebounded from a near five-week low as the dollar dropped on Monday, shrugging off earlier pressure by top Federal Reserve officials' comments fuelling speculation that U.S. interest rates would rise sooner rather … More »

  • EU to hand Apple Irish tax bill of over 1 billion euro, source says
    EU to hand Apple Irish tax bill of over 1 billion euro, source says Reuters - 40 minutes ago

    The European Commission will rule against Ireland's tax dealings with Apple on Tuesday, two source familiar with the decision told Reuters, one of whom said Dublin would be told to recoup over 1 billion euros in back taxes. The Commission declined … More »

  • China’s Credit Party Winds Down in Headwind for Economic Growth Bloomberg - 53 minutes ago

    The amount of local yuan bond sales minus maturities fell 39 percent in August from a year earlier for non-financial firms to 124 billion yuan ($18.6 billion), data compiled by Bloomberg show. China must balance cutting corporate debt, which more … More »

  • U.S. Stocks Approach Record High on Economic Data; Oil Slumps Bloomberg - 54 minutes ago

    Brazil’s Ibovespa extended the world’s biggest gain this year on speculation President Dilma Rousseff will be permanently removed from office. The monthly jobs report due this Friday may provide more clues on whether policy makers will have room to … More »

  • Estonia fails to elect president in first round
    Estonia fails to elect president in first round AFP News - 1 hour 13 minutes ago

    Estonia's parliament failed to elect a president Monday after none of the contenders for the largely ceremonial role received the necessary two-thirds majority of votes in round one of the race. The presidential election in the small Baltic state, … More »

  • Copper Drops to Lowest in Two Months on Ample Supply, China Woes Bloomberg - 1 hour 43 minutes ago

    Inventories tracked by exchanges in Shanghai, London and New York climbed five straight days last week to the highest since May. Barclays said in a report that a recent slump in the copper market “may be an early warning sign of weakening in China’s … More »

  • U.S. assets gain, European shares dip on Fed rate hike bets
    U.S. assets gain, European shares dip on Fed rate hike bets Reuters - 1 hour 46 minutes ago

    U.S. stock markets and the dollar climbed on Monday while European share markets fell, following comments by top Federal Reserve officials that bolstered expectations for an interest rate hike by the U.S. central bank this year. Fed Chair Janet … More »

  • Yale grad students file petition seeking union certification Associated Press - 2 hours 5 minutes ago

    Yale University graduate students on Monday petitioned the National Labor Relations Board for union recognition, saying they have organized to address concerns surrounding pay and benefits and give themselves ... … More »

  • South African Treasury, Eskom row over coal contracts as government rifts deepen Reuters - 2 hours 17 minutes ago

    South Africa's Treasury and state-owned Eskom clashed on Monday over a probe into coal contracts between the power utility and a company linked to the wealthy Gupta family that is accused of holding undue political sway over President Jacob Zuma. … More »

  • European privacy regulators to scrutinise WhatsApp privacy switch Reuters - 2 hours 22 minutes ago

    Facebook's move to relax the privacy policy of WhatsApp, the world's most popular mobile messaging application, will be closely scrutinised, the chair of Europe's leading group of privacy regulators said on Monday.     WhatsApp, which counts more … More »

  • US alarm as Turkey warns Syrian Kurd militia of more strikes
    US alarm as Turkey warns Syrian Kurd militia of more strikes AFP News - 2 hours 27 minutes ago

    Turkey warned Monday it would carry out more strikes on a Syrian Kurdish militia if it failed to retreat beyond the Euphrates River, as Washington voiced alarm over weekend clashes. Turkish forces pressed on with a two-pronged operation inside … More »

  • Berlin to require mums to come clean on 'milkmen's kids'
    Berlin to require mums to come clean on 'milkmen's kids' AFP News - 2 hours 44 minutes ago

    Germany has drafted a law requiring mothers to inform their partners if their children were fathered by another man, Justice Minister Heiko Maas said on Monday. It would apply to cases in which men who believe they are not the real fathers seek … More »

  • RUBBER-Tokyo futures prices after evening session Aug 29 Reuters - 3 hours ago

    Following are prices for Tokyo rubber futures at the end of the Tokyo market's evening session on Aug 2016. Contract Day Volume Evening Volume * Sep 156.0 25 - - * Oct 156.0 86 156.0 1 * Nov 153.8 75 153.6 ... … More »

  • Four Nomura Investment Bankers Said to Leave as Firm Shrinks Bloomberg - 3 hours ago

    Jason Fertig, who led Nomura’s health-care investment-banking group in the Americas, and Matthew Upton, a banker in the firm’s global-technology team, are joining Mizuho Financial Group Inc., the people said, asking not to be identified discussing … More »

  • Markets Right Now: Banks lead US stocks higher on rate hopes Associated Press - 3 hours ago

    The latest on developments in global financial markets (all times local): 11:45 a.m. Banks are leading stocks higher at midday as investors hope for higher interest rates. Wells Fargo, the nation's largest ... … More »

  • JPMorgan Index Move Puts $370 Billion Islamic Debt on Fund Radar Bloomberg - 3 hours ago

    Shariah-compliant notes will be eligible for inclusion in five JPMorgan gauges from Oct. 31 and will account for between 0.35 percent to 0.99 percent of total assets on the benchmarks, according to an Aug. 18 statement by the bank. Sukuk will be … More »

  • Yuan Bears Emerge From Hibernation as Fed Threatens G-20 Calm Bloomberg - 3 hours ago

    Derivative markets are pointing to renewed bets on yuan depreciation, with a three-month measure of expected price swings poised for the biggest monthly increase since January. The increased pessimism comes after a period of calm that sent the … More »

  • Statoil expects 'loads of' M&A deals coming up, strategy chief says
    Statoil expects 'loads of' M&A deals coming up, strategy chief says Reuters - 4 hours ago

    ** Says: "If you look at the acquisition and divestment markets for upstream oil and gas on a global basis over the last five years, they have been falling to all-time lows... but there are a number of active spots, one of those is in certain parts … More »

  • Liz Weston: 5 money myths you probably believe
    Liz Weston: 5 money myths you probably believe Associated Press - 4 hours ago

    Managing money can be complicated, and myths are often born from people's struggles to make it simpler. But simplistic solutions can cost you instead of saving you money. If you believe any of these five ... … More »

  • BOJ Needs Massive Move to Shock & Awe, $2 Trillion Investor Says Bloomberg - 4 hours ago

    “It is how much they do, and whether they can create that kind of shock and awe at this point in the cycle,” said Mark Haefele, global chief investment officer at UBS Wealth Management, in a Bloomberg Television interview, on Monday. “They could … More »

  • Singapore's GIC buys stake in Vietnam's bank AFP News - 5 hours ago

    Singapore sovereign wealth fund GIC will buy a 7.7 percent stake in Vietnam's biggest bank, both companies said in a joint statement on Monday. GIC signed a memorandum of agreement to buy 305.8 million new shares of Vietcombank, the fund's first … More »

  • Wall St rises as hawkish Fed boosts financial stocks
    Wall St rises as hawkish Fed boosts financial stocks Reuters - 5 hours ago

    Yellen, addressing a gathering of global central bankers on Friday, said the central bank was close to meeting its goals of maximum employment and stable prices, while describing consumer spending as "solid". Yellen gave little indication of when … More »

 
Recent Quotes
Symbol Price Change % Chg 
Your most recently viewed tickers will automatically show up here if you type a ticker in the "Enter symbol/company" at the bottom of this module.
You need to enable your browser cookies to view your most recent quotes.
 
Sign-in to view quotes in your portfolios.

MARKET MOVERS

  • Most Actives
    Most Actives
    NamePriceChange% Chg
    0.124-0.005-3.88%
    N21.SI
    0.735-0.020-2.65%
    G13.SI
    0.128+0.014+12.28%
    RE4.SI
    0.3550.0000.00%
    E5H.SI
    4.12-0.10-2.37%
    Z74.SI
  • % Gainers
    % Gainers
    NamePriceChange% Chg
    0.355+0.115+47.92%
    BAZ.SI
    0.151+0.024+18.90%
    D79.SI
    0.23+0.03+15.00%
    AWI.SI
    0.475+0.060+14.46%
    588.SI
    0.128+0.014+12.28%
    RE4.SI
  • % Losers
    % Losers
    NamePriceChange% Chg
    0.205-0.105-33.87%
    BCZ.SI
    0.25-0.10-28.57%
    BKX.SI
    0.13-0.05-27.78%
    AYL.SI
    0.165-0.055-25.00%
    BKZ.SI
    0.745-0.130-14.86%
    564.SI

Market Data

  • Currencies
    Currencies
    NamePriceChange% Chg
    1.3595+0.0013+0.10%
    USDSGD=X
    1.5204+0.0008+0.05%
    EURSGD=X
    1.78090.000.00%
    GBPSGD=X
    74.9450+0.263+0.35%
    SGDJPY=X
    5.7029-0.0018-0.03%
    SGDHKD=X
    2.9772+0.0109+0.37%
    SGDMYR=X
    9,759.0078+10.8193+0.11%
    SGDIDR=X
    4.9125+0.0063+0.13%
    SGDCNY=X
    1.0296+0.0033+0.32%
    AUDSGD=X
  • Commodities
    Commodities
    NamePriceChange% Chg
    1,326.30+0.40+0.03%
    GCZ16.CMX
    18.82+0.16+0.88%
    SIU16.CMX
    96.92+1.13+1.17%
    ^XAU
    2.080.00+0.12%
    HGU16.CMX
    46.99-0.65-1.36%
    CLV16.NYM
  • Bonds
    Bonds
    TreasuryYield (%)Yield Change
    1.18-0.06
    ^FVX
    1.57-0.07
    ^TNX
    2.22-0.08
    ^TYX